21 Dec Section 338(h)(10) Election – Both a Stock and an Asset Purchase (Part 2 of 3)
- T has several assets that require title transfer that would be burdensome in an asset purchase.
- T has contracts that are difficult to transfer.
- T has favorable workers compensation and/or unemployment ratings that P wants to preserve.
- T has historical preferences with governing bodies that would be lost in an asset sale.
- T (a C Corp) has tax attributes that will survive (e.g. net operating loss carryovers).
- T’s corporate name is retained.
- P and T make a joint H-10 Election by filing IRS Form 8023 by the 15th day of the ninth month after the acquisition.
- All of Old Target’s (T1’s) S Corp shareholders must agree to the election – even though up to 20% (vote and value) may not be selling their stock.
- New Target (T2) obtains an adjusted grossed-up basis (AGUB) in the acquired assets.
- T2’s AGUB is based upon the consideration paid for T1 stock, plus T1 liabilities that were assumed.
- The AGUB asset allocation is reported by T1 and T2 on IRS Form 8883.
- T1 files a final S Corp tax return as of the acquisition date and liquidates for tax purposes.
- Now the subsidiary of P (a C Corp), T2 becomes a C Corp since an S Corp cannot be owned by a C Corp (this will be discussed in tomorrow’s posting).
Darrell Arne began his professional career in public accounting in 1970. In 1983, Darrell formed his own CPA practice, with emphasis on business valuation; by 1992, he had earned the Accredited Senior Appraiser (ASA) designation in business valuation. He then earned the Certified Business Intermediary (CBI) designation in 1995, and Certified Merger & Acquisition Advisor (CM&AA) designation in 2008.
He discontinued practicing in public accounting in 1994 when he formed Arne & Co., specializing in exit strategy planning for business owners, business valuations, business acquisitions & sales, business dispute mediation, part-time CFO services, and developer of business training seminars.